Eurodollar futures: introduction

Here is an introduction to the Eurodollar futures contract using current quotes to illustrate: Assume we take a long position in a December 2008 Eurodollar futures contract. The quote is 97.005. That means we are "locking in" an annualized LIBOR rate of 2.995% (1100 -- 97.005). The quote of 97.005 corresponds to a contract price of $992,513 (the contract is on a par of $1 million). If the LIBOR rate declines to, say, 2.0% in December, the quote goes up to 98 (100 -- 2) and contract price goes up to $995,000. As a long position, we gained (by design) $25 per 1 basis point decline in the LIBOR.

Category:

Education

Tags:

• Finance
• bond
• eurodollar
• futures
• interest
• rates

[rbapat]

Hi, The presentation is realy short and nice good for learning how erudollar works. Can you please tell how you arrived to the formulea and describe and why 10,000 has been used.

[bionicturtledotcom]

Thanks, appreciate that. The formula is per the design of the contract, so the exchange really sets it. Because somebody wanted a 1 point to equal $25. The 10,000 is used (not uncommonly) to convert a decimal basis point into an integer. For example 1 bps = 0.01% = 0.0001. Well, that's clumsy, so 10,000 * 0.0001 = 1.

David H

[travispavlik]

It would be awesome to demonstrate the TED spread trade...nobody has it anywhere. Thanks! Long Treasury short Eurodollar different options 3 months vs longer duration

[vipinanandcpp]

Very very good explanation........I follow your vids a lot...very informative...Keep it up

[bloodfoxtrue]

is the "100" convention? (just like how 90 days is a convention)?

[6642633]

Thank you very much

[pootranon]

Thank you so much for your presentation.

[userDone]

Hi David, Accourding the Dave's Hall book which seems like you followed...It said that " when a Eurodollar future quote increase by 1 basis point, a trader who is long one contract gains $25 and a trader who is short one contract loses $25. Similarly when the quotes decreases by 1 psp a trader who is long one contract loses $25 and a trader who is short one contract gains $25"

[nartabose]

Thank you very much ,u made a great illustration , so i can understand its machanism very very clearly...

[GerryBB]

Hi David, great explanation and thanks. Can you also tell me why the pricing of Eurodollar futures is difficult because of the fact that LIBOR is an add-on rate. I know that it is due to the special design of Eurodollar futures which makes the hedging not 100% perfect. I'd like to know the formulae behind. Thanks. :)